Basis of Presentation: The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Stericycle, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's Condensed Consolidated Financial Statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenues and expenses of all wholly owned subsidiaries and majority-owned subsidiaries over which the Company exercises control. Outside shareholders' interests in subsidiaries are shown on the Condensed Consolidated Financial Statements as “Noncontrolling interests."

The accompanying unaudited Condensed Consolidated Financial Statements as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 have been prepared pursuant to the rules and regulations of the SEC for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements prepared in conformity with U.S. GAAP. However, in the opinion of management, all adjustments, consisting of normal recurring adjustments necessary to present fairly the results of operations, financial position and cash flows have been made. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2018 Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year or any other period.

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Some areas where the Company makes estimates include its allowance for doubtful accounts, credit memo reserve, accrued employee health and welfare benefits, environmental liabilities, stock-based compensation expense, income tax liabilities, accrued auto and workers’ compensation insurance claims, intangible asset valuations and long-lived asset and goodwill impairment assessments. Such estimates are based on historical trends and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from the Company’s estimates.

Leases (Accounted for as of January 1, 2019 and thereafter under ASC 842): Operating leases are included in Operating lease ROU assets, Operating lease liabilities and Long-term operating lease liabilities on the Company’s Condensed Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment, Current portion of long-term debt, and Long-term debt on the Condensed Consolidated Balance Sheets.

Operating lease ROU assets, Operating lease liabilities and Long-term operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Nearly all of the Company’s lease contracts do not provide a readily determinable implicit rate. For these contracts, the Companyuses an estimated incremental borrowing rate, which is based on information available at the lease commencement. The Company used estimated incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.

The Company’s leases generally do not require material variable lease payments and generally do not contain options to purchase the leased property, any material residual value guarantees, or material restrictive covenants. At commencement, the Operating lease ROU asset is equal to the lease liability and is adjusted for lease incentives and initial direct costs incurred. The Company reviews all options to extend, terminate, or purchase its ROU assets at the commencement of the lease and on an ongoing basis and accounts for these options when they are reasonably certain of being exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, including payments for common area maintenance and vehicle maintenance costs, which are accounted for separately for each class of underlying assets.

In addition, the Company applies the short-term lease recognition exemption for leases with terms at commencement of not greater than 12 months.

Adoption ofNew Accounting Standards:

Leases

In February 2016, the FASB issued ASC 842. The amended guidance, which was effective for the Company on January 1, 2019, requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and previously classified as operating leases. The Company elected the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented.

The Company elected to apply a package of practical expedients which allowed it to not reassess at transition: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance.

The standard had a material impact on the Company’s Condensed Consolidated Balance Sheets, but did not have an impact on the Company’s Condensed Consolidated Statements of (Loss) Income. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged (see Note 5 – Leases).

Derivatives and Hedging

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging” (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 amends the hedge accounting recognition and presentation requirements with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and enhance the transparency and understandability of hedge transactions. In addition, ASU 2017-12 makes improvements to simplify the application of the hedge accounting guidance. ASU 2017-12 was effective for the Company on January 1, 2019, and the adoption did not have a material impact on the Condensed Consolidated Financial Statements.

Stranded Tax Effects

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the Tax Act to be reclassified to retained earnings. ASU 2018-02 was effective for the Company on January 1, 2019. The adoption of ASU 2018-02 did not have a material impact on the Condensed Consolidated Financial Statements.

Stock Compensation

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 extends the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 was effective for the Company on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Condensed Consolidated Financial Statements.

Changes in Stockholders Equity and Noncontrolling Interest

In August 2018, the SEC issued the final rule amending Rule 3-04 of Regulation S-X (“Rule 3-04”), which requires entities to disclose changes in stockholders’ equity in the form of a reconciliation for the current and comparative year-to-date interim periods, with subtotals for each interim period. The Company adopted Rule 3-04 in the first quarter of fiscal 2019.

Accounting Standards Issued But Not Yet Adopted

Financial Instrument Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” (“ASU 2016-13”) associated with the measurement of credit losses on financial instruments. ASU 2016-13 replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. The amended guidance is effective for us on January 1, 2020. The Company is evaluating the impact of adopting ASU 2016-13 on the Condensed Consolidated Financial Statements.

Implementation Costs Incurred in a Cloud Computing Arrangement

In August 2018, the FASB issued ASU 2018-15, “Intangibles -Goodwill and Other - Internal Use Software (Subtopic 250-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. The accounting for any hosting contract is unchanged. ASU 2018-15 is effective on January 1, 2020 with early adoption permitted, including adoption in any interim period. The Company is evaluating the impact of adopting ASU 2018-15 on the Condensed Consolidated Financial Statements.

The following table presents revenues disaggregated by service and primary geographical regions, and includes a reconciliation of disaggregated revenue to revenue reported by reportable segments, Domestic and Canada RWCS and International RWCS:

In millions

Three Months Ended June 30, 2019

Reportable Segment

Domestic and Canada RWCS

International

RWCS

All Other

Revenues by Service:

United States

Canada

Europe

Others

United States

Total

Medical Waste and Compliance Solutions

$

278.1

$

10.6

$

61.2

$

40.4

$

-

$

390.3

Secure Information Destruction Services

180.0

16.6

29.7

3.1

-

229.4

Hazardous Waste Solutions

84.7

-

-

-

-

84.7

Manufacturing and Industrial Services

63.1

6.2

0.9

8.0

-

78.2

Communication Services

-

3.9

0.4

-

34.8

39.1

Expert Solutions

-

2.6

1.7

-

19.8

24.1

Total

$

605.9

$

39.9

$

93.9

$

51.5

$

54.6

$

845.8

Reportable Segment Total

$

645.8

$

145.4

$

54.6

$

845.8

In millions

Three Months Ended June 30, 2018

Reportable Segment

Domestic and Canada RWCS

International

RWCS

All Other

Revenues by Service:

United States

Canada

Europe

Others

United States

Total

Medical Waste and Compliance Solutions

$

284.3

$

9.9

$

65.0

$

49.1

$

-

$

408.3

Secure Information Destruction Services

179.6

16.6

30.7

3.1

-

230.0

Hazardous Waste Solutions

75.5

-

-

-

-

75.5

Manufacturing and Industrial Services

65.1

5.7

6.2

11.2

-

88.2

Communication Services

-

4.7

4.0

-

36.0

44.7

Expert Solutions

-

3.1

2.3

-

31.2

36.6

Total

$

604.5

$

40.0

$

108.2

$

63.4

$

67.2

$

883.3

Reportable Segment Total

$

644.5

$

171.6

$

67.2

$

883.3

In millions

Six Months Ended June 30, 2019

Reportable Segment

Domestic and Canada RWCS

International

RWCS

All Other

Revenues by Service:

United States

Canada

Europe

Others

United States

Total

Medical Waste and Compliance Solutions

$

561.2

$

20.7

$

123.3

$

82.6

$

-

$

787.8

Secure Information Destruction Services

362.1

32.6

60.4

6.3

-

461.4

Hazardous Waste Solutions

156.4

-

-

-

-

156.4

Manufacturing and Industrial Services

117.2

11.5

1.9

15.3

-

145.9

Communication Services

-

7.9

3.5

-

69.4

80.8

Expert Solutions

-

5.0

3.4

-

35.2

43.6

Total

$

1,196.9

$

77.7

$

192.5

$

104.2

$

104.6

$

1,675.9

Reportable Segment Total

$

1,274.6

$

296.7

$

104.6

$

1,675.9

In millions

Six Months Ended June 30, 2018

Reportable Segment

Domestic and Canada RWCS

International

RWCS

All Other

Revenues by Service:

United States

Canada

Europe

Others

United States

Total

Medical Waste and Compliance Solutions

$

577.1

$

19.7

$

130.3

$

101.1

$

-

$

828.2

Secure Information Destruction Services

349.9

32.8

61.1

6.1

-

449.9

Hazardous Waste Solutions

153.0

-

-

-

-

153.0

Manufacturing and Industrial Services

123.9

11.2

14.9

24.0

-

174.0

Communication Services

-

9.2

9.3

-

75.7

94.2

Expert Solutions

-

6.2

5.1

-

67.7

79.0

Total

$

1,203.9

$

79.1

$

220.7

$

131.2

$

143.4

$

1,778.3

Reportable Segment Total

$

1,283.0

$

351.9

$

143.4

$

1,778.3

Contract Liabilities

Contract liabilities at June 30, 2019 and December 31, 2018 were $14.5 million and $15.0 million, respectively. Contract liabilities as of June 30, 2019 are expected to be recognized in Revenues, as the amounts are earned, which will be over the next twelve months.

Contract Acquisition Costs

The Company’sincremental direct costs of obtaining a contract, which consist primarily of sales incentives, are deferred and amortized to SG&A over a weighted average estimated period of benefit of 6.3 years.

During the three months ended June 30, 2019 and 2018, the Company amortized $2.1 million and $1.6 million, respectively, of deferred sales incentives to SG&A.

During the six months ended June 30, 2019 and 2018, the Company amortized $4.3 million and $3.2 million, respectively, of deferred sales incentives to SG&A.

Total contract acquisition costs, net of accumulated amortization, were classified as follows:

As part of overall business strategy, in the third quarter of 2017, the Company initiated a comprehensive multi-year Business Transformation, which it expects to complete by 2022, with the objective to improve long-term operational and financial performance. Through June 30, 2019, the Company has incurred nearly all the originally anticipated employee termination charges, including incremental charges related

principally to executive management, in connection with its initial restructuring estimate. As the Company continues to consider each key initiative of the Business Transformation additional charges may be recorded. The amount, timing and recognition of any such charges will be affected by the occurrence of triggering events, as defined under U.S. GAAP, among other factors.

During the six months ended June 30, 2019, the Company recognized $5.3 million in charges related to executive and employee termination costs, of which $4.6 million was recognized within All Other, $0.6 million was recognized within the International RWCS reportable segment, and $0.1 million was recognized within the Domestic and Canada RWCS reportable segment. These amounts are reflected as part of SG&A in the Condensed Consolidated Statements of (Loss) Income and will be paid out over approximately two years. As of June 30, 2019, approximately $4.6 million in future payments remained outstanding.

Divestitures

During the six months ended June 30, 2019, the Company completed, as part of its portfolio rationalization, the sale of the non-core U.K. based texting business that was part of the International RWCS reportable segment. The proceeds of the sale were $14.9 million, including a $1.3 million note receivable due in six months from the closing of the transaction, resulting in a pre-tax gain of approximately $5.8 million, which is recognized in SG&A in the Condensed Consolidated Financial Statements.

During the three months ended June 30, 2018, the Company entered into an agreement to sell a business that was part of the Domestic and Canada RWCS reportable segment, which closed on August 1, 2018. The assets and liabilities of this business were classified as held for sale as of June 30, 2018 on the Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2018, the Company recorded non-cash impairment charges of $6.9 million in SG&A in the Condensed Consolidated Statements of (Loss) Income in connection with reclassifying the assets and liabilities as held for sale.

During the six months ended June 30, 2018, the Company completed the sale of a business in the U.K. for consideration of approximately $11.5 million, of which $8.2 million was received in cash and $3.3 million is held in escrow. Prior to sale, the Company had recorded total non-cash impairment charges of $14.8 million in connection with reclassifying the assets and liabilities as held for sale and subsequent changes in the fair value of these assets, including $0.1 million and $4.2 million during the three and six months ended June 30, 2018, respectively. These charges were included in SG&A in the Condensed Consolidated Statements of (Loss) Income.

Changes in the carrying amount of goodwill by reportable segment were as follows:

In millions

Domestic and

Canada RWCS

International RWCS

All Other

Total

Balance as of December 31, 2018

$

2,848.4

$

373.8

$

-

$

3,222.2

Goodwill acquired during period

-

-

-

-

Valuation adjustments from prior year acquisitions

(3.6

)

-

-

(3.6

)

Impairment during the period

-

(20.9

)

-

(20.9

)

Divestiture of business

-

(6.2

)

-

(6.2

)

Changes due to foreign currency fluctuations

5.1

(1.5

)

-

3.6

Balance as of June 30, 2019

$

2,849.9

$

345.2

$

-

$

3,195.1

During the first quarter of 2019, there were business, market, and strategic developments which negatively impacted the estimated cash flows of the Company’s Latin America reporting unit and triggered an interim assessment as of March 31, 2019. The Company determined that the Latin America reporting unit’s carrying value was in excess of its estimated fair value.

Factors that contributed to the decrease in the estimated fair value of the Latin America reporting unit as of March 31, 2019, included continued challenges and volatility in certain of the Company’s markets due to declining market trends, cost pressures and insights from strategic developments.

These items were factored into updates to the Company’s forecasted cash-flow assumptions during the first quarter to reflect the Company’s current outlook. As a result of this impairment assessment, the Company recognized $20.9 million of non-cash goodwill impairment charges related to the Latin America reporting unit. Following the impairment, the Latin America reporting unit has no remaining goodwill.

The Company did not record any goodwill impairment charges during the three months ended June 30, 2019.

The Company has operating leases for transfer sites, processing facilities, communication centers, corporate and regional offices, vehicles, and certain equipment.

The components of net lease cost were as follows:

In millions

Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Operating lease cost

$

28.7

$

57.9

Finance lease cost

Amortization of leased assets

0.5

1.6

Interest on lease liabilities

0.2

0.4

Net lease cost

$

29.4

$

59.9

Short-term lease cost, variable lease cost and sublease income were not significant during the period.

Supplemental cash flow information related to leases was as follows:

In millions

Six Months Ended June 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

59.5

Operating cash flows from finance leases

0.4

Financing cash flows from finance leases

1.3

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

82.8

Finance leases

-

Finance lease assets, net of accumulated amortization, were $20.9 million as of June 30, 2019 and are included in Property, Plant and Equipment, net on the Condensed Consolidated Balance Sheet.

Information regarding lease terms and discount rates is as follows:

In millions

June 30, 2019

Weighted average remaining lease term (years):

Operating leases

6.7

Finance leases

6.1

Weighted average discount rate:

Operating leases

4.0

%

Finance leases

5.0

%

Maturities of lease liabilities as of June 30, 2019, were as follows:

In millions

Operating leases

Finance leases

2019

$

55.1

$

3.0

2020

95.8

5.9

2021

78.8

2.5

2022

60.9

2.3

2023 and thereafter

171.5

7.9

Total lease payments

462.1

21.6

Less: Interest

55.4

3.1

Present value of lease liabilities

$

406.7

$

18.5

As of June 30, 2019, the Company had $12.0 million of additional operating leases, primarily related to buildings, for which the underlying operating lease had not yet commenced. These operating leases are expected to commence in fiscal years 2019 and 2020 with lease terms of 1 to 15 years.

Promissory notes and deferred consideration weighted average maturity 2.6 years at 2019 and 2.7 years at 2018

100.2

120.9

Foreign bank debt weighted average maturity 1.6 years at 2019 and 1.9 years at 2018

83.0

76.7

Obligations under capital leases

18.5

20.3

Total debt

2,830.8

2,778.7

Less: current portion of total debt

117.3

104.3

Less: unamortized debt issuance costs

16.3

10.5

Long-term portion of total debt

$

2,697.2

$

2,663.9

On June 14, 2019, the Company completed the following transactions:

a)

Issued $600.0 million at par of aggregate principal Senior Notes, due July 2024, which are unsecured and bear interest at 5.375% per annum, payable on January 15 and July 15 of each year. The Senior Notes are fully and unconditionally guaranteed by each of the Company’s current domestic subsidiaries that guarantee the Company’s Senior Credit Facility. The Indenture limits the ability of the Company and its subsidiaries to incur certain liens, enter into certain sale and leaseback transactions, and consolidate, merge or sell all or substantially all of their assets.

The Senior Notes will be redeemable, at the option of the Company, in whole or in part, at any time on or after July 15, 2021, at the redemption prices specified in the Indenture along with accrued interest. At any time prior to July 15, 2021, the Senior Notes may be redeemed, at the option of the Company, in whole or in part, at a redemption price of 100% of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest. In addition, the Company may redeem up to 40% of the Senior Notes at any time before July 15, 2021, with the net cash proceeds from certain equity offerings at a redemption price equal to 105.375%, plus accrued and unpaid interest.

In the event of both a change of control of the Company and a rating downgrade by the rating agencies, the Company will be required to offer to repurchase all outstanding Senior Notes at 101% of their principal amount, plus accrued and unpaid interest.

The Indenture contains customary events of default, which include (subject in certain cases to customary grace and cure periods), nonpayment of principal or interest; breach of other agreements in the Indenture; failure to pay certain other indebtedness; certain events of bankruptcy or insolvency; failure to pay certain final judgments; and failure of certain guarantees to be enforceable.

b)

Executed the Fourth Amendment which amends the Credit Agreement to (i) provide an incremental Term Loan of $365.0 million, (ii) modify the definition of “Consolidated EBITDA” to allow for the continuation of cash addbacks to EBITDA, up to a maximum of $200.0 million, (iii) revise the financial covenant requiring that the Company’s Consolidated Leverage Ratio cannot exceed: (a) 4.50 to 1.00, in the case of any fiscal quarter ending on or before March 31, 2020, (b) 4.25 to 1.00, in the case of any fiscal quarter ending during the period from April 1, 2020 through September 30, 2020, (c) 4.00 to 1.00, in the case of the fiscal quarter ending December 31, 2020, and (d) 3.75 to 1.00, in the case of any fiscal quarter ending thereafter and (iv) make certain other modifications to negative covenants related to restricted payments and investments that the Company may make.

c)

Repaid in full $1.075 billion of the outstanding private placement notes using the net proceeds from the Senior Notes and the incremental Term Loan together with additional borrowings under the Senior Credit Facility.

In connection with the issuance of the Senior Notes the Company incurred $7.1 million of direct issuance costs, which have been capitalized in unamortized debt issuance costs and are being amortized to Interest expense, net over the term of the Senior Notes. As of June 30, 2019, $0.1 million of the issuance costs remain unpaid and have been included in Accrued liabilities.

In connection with the Fourth Amendment, the Company incurred issuance costs of $2.0 million, of which $0.2 million has been charged to Interest expense, net and the remainder capitalized as unamortized debt issuance costs and are being amortized to Interest expense, net over the remaining term of the Credit Agreement.

In connection with the repayment of the private placement notes, the Company incurred a loss on early extinguishment of debt of $23.1 million comprising make whole premiums, payable under the terms of certain of the private placement notes, of $20.4 million and the write-off of $2.7 million of unamortized debt issuance costs associated with the private placement notes.

In addition, $3.4 million, representing the unamortized portion of premiums associated with interest rate locks executed in connection with the issuance of certain of the private placement notes, was recorded in Interest expense, net. These amounts were previously included in Accumulated other comprehensive loss.

As of June 30, 2019, the Company was in compliance with its Consolidated Leverage Ratio covenant, with an actual ratio of 4.36 to 1.00, which was below the allowed maximum ratio of 4.50 to 1.00 as set forth in the Fourth Amendment.

Based upon the Company’s current financial projections, it is reasonably likely that the Company could exceed this Consolidated Leverage Ratio threshold at some point in the next twelve months. This risk can be mitigated and potentially managed through appropriate spending controls, divestitures, restructuring the Company’s existing indebtedness, amending the Credit Agreement, or seeking temporary relief from the Consolidated Leverage Ratio covenant from the Company’s lenders.

A failure to comply with these provisions could result in an event of default. Upon an event of default, unless waived, the lenders could elect to terminate their commitments, cease making further loans, require cash collateralization of letters of credit, and/or cause their loans to become due and payable in full which could cause the Company and the Company’s subsidiaries to enter into bankruptcy or liquidation.

Amounts committed to outstanding letters of credit, the unused portion of the Company’s Senior Credit Facility and other letters of credit outstanding as of June 30, 2019 and December 31, 2018, were as follows:

Income tax benefit was $3.0 million for the three months ended June 30, 2019 compared to expense of $9.6 million for the three months ended June 30, 2018. The effective tax rates for the three months ended June 30, 2019 and 2018 were 9.0% and 25.8%, respectively. The effective tax rate for the three months ended June 30, 2019 was lower principally due to valuation allowances recognized against current period losses in several countries. The effective tax rate for the three months ended June 30, 3018 was higher than customary as a result of the impact of certain tax reserves and deferred tax adjustments.

Income tax expense was $0.6 million for the six months ended June 30, 2019 compared to $16.2 million for six months ended June 30, 2018. The effective tax rates in the first half of 2019 and 2018 were (0.9)% and 24.4%, respectively. The negative effective tax rate for the six months ended June 30, 2019 is due to the non-deductible impact of the goodwill impairment recorded in the first quarter of 2019 and valuation allowances recognized against current year losses in several countries. The effective tax rate for the six months ended June 30, 3018 was higher than customary as a result of the impact of certain tax reserves and deferred tax adjustments.